Persistence in Style-Adjusted Mutual Fund Returns

Do Managerial Skills Vary Across Fund Managers? Results Using European Mutual Funds

“…We are therefore able to conclude that the performance variation between the winner and loser portfolios cannot be explained by asset pricing models that are consistent with insatiability and risk aversion. These results, although obtained with a different risk adjustment approach, are similar to those reported in Teo and Woo (2001) for American mutual funds, where return persistence is observed to increase after style adjustment.…”

“…Pomorski (2004) also asserts that style returns may carry information about the skill of fund managers. In line with Teo and Woo (2001), our results show that the winner portfolio stochastically dominates the loser portfolio, both for the full sample and for all of the sub samples grouped by geographical scope of investment objective.…”

“…These results also differ from those obtained before style adjustment, in that the persistence continues for 4 years, while in previous case it had faded by the end of the first year of the holding period. 14 The longerlasting persistence observed after style adjustment is also largely consistent with Teo and Woo (2001) who report performance persistence lasting for periods of up to 6 years.…”

“…Panel B shows the same results for the Davidson and Duclos (2000) We therefore perform a second analysis, similar to the one shown above, but this time using style-adjusted returns. In this case, following the methods used by Teo and Woo (2001) and even Agarwal and Naik (2000), the style-adjusted return to a fund is approximated by taking the difference between its return at a given point of time and the average return of other funds following a similar investment style during that period. As already mentioned, the investment style data used in this study are drawn from Morningstar, who identify investment style by means of a three-digit code.…”

“…Thus, Teo and Woo (2001) state that the skills of fund managers should be judged against others investing in the same style, since, otherwise, the observed phenomenon might actually be style persistence rather than superior managerial skills in certain managers. A similar adjustment procedure is also used in Agarwal and Naik (2000) to test for return persistence in hedge funds.…”